Is Heritage Foods (NSE:HERITGFOOD) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Heritage Foods Limited (NSE:HERITGFOOD) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Heritage Foods

What Is Heritage Foods's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Heritage Foods had ₹236.3m of debt, an increase on ₹94.8m, over one year. However, its balance sheet shows it holds ₹1.16b in cash, so it actually has ₹924.4m net cash.

How Strong Is Heritage Foods' Balance Sheet?

We can see from the most recent balance sheet that Heritage Foods had liabilities of ₹2.19b falling due within a year, and liabilities of ₹1.01b due beyond that. On the other hand, it had cash of ₹1.16b and ₹356.4m worth of receivables due within a year. So it has liabilities totalling ₹1.69b more than its cash and near-term receivables, combined.

Given Heritage Foods has a market capitalization of ₹24.7b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Heritage Foods also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Heritage Foods has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Heritage Foods can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Heritage Foods may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Heritage Foods's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Heritage Foods's liabilities, but we can be reassured by the fact it has has net cash of ₹924.4m. And we liked the look of last year's 23% year-on-year EBIT growth. So we don't think Heritage Foods's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Heritage Foods (of which 1 is a bit unpleasant!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.